The Downside of a Booming Art Market: Taxes

Here's how to lower the tax hit on your heirs if the value of your art collection exceeds your estate-tax exemption.

This transcript has been automatically generated and may not be 100% accurate.

I ... the stock market is charged with a five-year rally ... but the art market's rally has gone on far longer ... and Jack Otter Editor Barron's dot com on his return raises the editor of Barron's Penta ... Sir Richard this of course is wonderful news for some of the collectors to your address in your stories but there's also a Tax headache that goes along ... with its appreciation in our collection ... though the Art Nessie fifty has basically could ruble on the last decade the law ... so lot of people who over thirty years bots ... contemporary art ... I haven't been their second home summon warehouses summon their primary home ... Q recently ... those figures map of the value of the collection can be brave you weigh over the gift tax exclusion which is you know is a little over ten million dollars per couple in total over five man for an individual ... and so that creates headaches because ... if you haven't thought beforehand about how you were going to pass on your collection what happens is is that ... sometimes the estate lawyers are telling us ... is that someone die is ... the errors find that the value of the color of content every collection has so increase in value ... they have to in some cases a sixty percent ... in best taxes for the collection because it's based on the fair market value at that point ... and they're having to you know in in yet to pay your bill and nine monster tax on I'm on so they're having to mass liquidate and dispose of our works without careful thought ... and creates a huge headache for the ears if it's not done enough and ... we all thought out and like met ... so course they're couple different ways you can go with your question the most obvious perhaps would be leading it to your children ... and even that is complicated there some missteps that people should take immediately of you know in in their fifties or forties ... aam but also it can even very state by state Ask recommend for example if the psychological ... if your an a ... on high in a state with high capital gains in say California where you know it could be forty four percent ... well what you want to do that as past the artworks on using your gift tax exclusion ... conversely if in your anus in a state like Florida or with no income tax or capital gains ... and then passing under Will makes perfect sense ... so you want to see the is CEO of it get advice from your advisors ... and make sure that where you're located is soo it's the right you have the right pass on vehicle for for we are located in one of the things that set a wealth advisor we speak to talk about with their their high net worth clients is ... they're blowing past the ten point seven million dollars vision by using various trusts with ... Tom and securities in stocks and bonds is usually what's called a grafts ... but with some artwork it section summing else a charitable trust for you can also use that but if you want to leave your ... btw your collection to ... tear it into a ... van ... on ... a grantor retained ... trusts ... terrible shots are very dial so what happens in that case ... is that you early on you puts you wanna put the artwork as early as possible into the trust ... because that does count to your gift to your your lifetime gift tax ... exclusion ... and ... so if it's low if you put in her away the value is lower CUDA yet more or less of your gift tax exclusion ... the value increases in the traps ... and then what you can do is the has an annuity attach it so that it periodic the deal liquidated you'll take Abbott's a five percent annuity for yourself ... and then when you die and if anything that's left over is given tax free to sit to charity ... but you have to be careful ... there are certain rules it has to be ... you know related so ... you know you can get here by asking us to the Museum of modern art ... that way but it gets old tricky and you can really don't give him a classic car cheer on the mock ... it's a very complicated and I hate to say people need to speak to a professional but they do have the worst thing you can do is is just not do anything images of a deal to ... yell because you know if you this is part of your like to see and if you if you if you just refuse to tackle the issue ... and and and you pass on ... your kids are going to be forced to do things ... like told to liquidate your your collection rather than keep it together which is the most good the emotion spanning from them too because you know as part of what you've left ... some new thing about on the happy for the thoughtful on to a restaurant Richard ... attack ...